Inventory Cost Flow Assumptions And Limitations Of Lifo: A Case Study Of A Manufacturing Firm In Albani

Valuing the inventory at its cost has become a crucial need as a firm needs to know the cost it makes for the products made and sold and how the cost will have an impact on the firm’s gross profit, tax to be paid, net income, and at the ending inventory during a specific accounting period. The two most known financial reporting standards, namely IFRS and U.S. GAAP, allow the use of an inventory cost flow assumption. This study mainly focuses on inventory cost flow assumptions. It is found, through the information collected, that the Albanian accounting system accepts Specific Identification (SI), First In, First Out (FIFO), and Weighted Average Cost (WAC) Flow Methods. At the same time, the most adopted inventory cost flow assumptions are the latter two, respectively. The second question emphasizes the reasons for the Last In, First Out (LIFO) cost flow assumption bans by IFRS and Albanian accounting standards. A case study of an actual manufacturing firm was used to conduct an empirical analysis and application of LIFO and WAC flow assumptions, resulting that the WAC flow assumption is more favorable to be used as it provides lower COGS, and a cost of the ending inventory, closer to the one with the current market prices.